Whilst over the last few decades life expectancy, child mortality, literacy and education enrolment have increased , this progress has been uneven and confined to particular groups of people (UNDP 2000). There are still 2.8 billion people living on less than $2 a day, in poorer countries a fifth of children die before the age of five and almost half
remain malnourished. In the next 25 years, two billion people will be added to the world’s population of which 97
per cent will be in developing countries (World Bank 2000). There has been a growing recognition amongst development practitioners that poverty alleviation is best achieved by empowering the disadvantaged and giving them the right and the opportunity for self-determination. The poor are faced with many difficulties in improving their livelihoods including limited access to health, education and income opportunities. Whilst the measurement of poverty has moved from relying solely on income figures to a more multidimensional concept encompassing freedom, civil rights and equality, the efficient use and availability of financial resources is still regarded as critical to sustainable poverty alleviation.

In recent decades a number of microfinance institutions have been established to provide access to savings and credit to the poor. These informal schemes are designed to empower the individual to become more self-sufficient and to give them the ability to protect and provide for their family. Despite widespread scepticism from academics these products have been positively received by the poor. This has demonstrated that the poor are not weak helpless individuals who rely on handouts, but are determined people wanting to improve their livelihoods and wanting to overcome the challenges facing them. More importantly the poor have shown that they have the capacity and the desire to save and to repay loans. Subsequently many hundreds of microfinance schemes are now in operation informally and formally across the world today.

However, the effectiveness of improved access to credit and savings on poverty alleviation is dependent on how these additional financial resources are utilised by the poor. The poor are faced with many risks and are highly vulnerable to fluctuations in their income and expenses arising from health costs, property theft and fire, violence, death, disability and catastrophes. Available credit and savings provide some protection against the effect of these losses, but by using all of their available financial resources to try and recover from these events many find themselves falling further into poverty. In the last few years development institutes have recognised that microinsurance products are the most appropriate way to lower the impact of these risks on the poor and to ensure more effective use of credit and savings. However, insurance provision is much more complex than credit and savings and a number of recently established schemes have failed to provide adequate cover on a sustainable basis.

The study addresses two central issues, firstly, the importance of insurance in supporting poverty alleviation, and secondly, what measures can be taken to provide a sustainable and viable microinsurance scheme. Chapter one looks at the reasons why the poor are so vulnerable, the impact on their livelihood, and how savings, credit and insurance can assist overcoming vulnerability. The second Chapter reviews the problems facing micro-insurance providers and chapter three looks at solutions that have so far been implemented, in particular the use of the co-operative structure to deliver insurance products to the poor. As there are still very few micro-insurance schemes which have proved their viability and sustainability chapter four looks at additional areas that need to be addressed. Chapter five provides some recommendations and concluding remarks.

Conclusions

The study highlights the importance insurance has in supporting the sustainable development of the poor and reducing the inequality in developing countries. Due to the complexity of insurance it is recommended that the microinsurance provider initially seeks a partnership with either an existing established insurance company or industry experts whose technical skills, technology and experience can be used to benefit the poor. Formal insurance organisations do not service the poor due to the lack of returns and high risks involved. For this reason the co-operative structure is the most appropriate to overcome conflicting objectives of profit and self-interest with the need to provide protection to where it is needed the most. The study also demonstrates how co-operative principles are acceptable under Islamic law as opposed to conventional insurance schemes, over half of the least developed nations in the world have a majority Muslim population and are without access to insurance protection.

The International Co-operative and Mutual Insurance Federation (ICMIF) has a wide range of resources and services available to assist the establishment and growth of microinsurance providers in developing countries. It is recommended that the involvement of organisations such as ICMIF in supporting the provision of insurance
products to the poor increase the possibility of achieving sustainability and viability. On a broader scale the study concludes that there is a need for more concerted effort to facilitate an enabling environment through “microregulations” and “microreinsurance schemes”. These can only be achieved by the co-ordinated lobbying and collaboration of activities between all organisations working to serve the needs of the poor.
Whilst there is no single solution to poverty eradication, insurance can provide the individual with a secure environment and a firm foundation to improve his/her standard of living.

1.1 The plight of the poor
Countless explanations have been put forward for the despairing situation of the many millions of poor people in developing countries. An understanding of these reasons and the characteristics of the poor are important when discussing the potential role of insurance mechanisms (Appendix One).

The livelihoods of citizens in countries with low human development
compared to high human development

HDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI value equal to or more than 0.800 has high human development, 0.500-0.799 HDI has medium human development and a HDI below 0.500 reflects low human development and well being.

•GDI (Gender-related development index) – composite index using same variables as HDI but adjusted in accordance with the disparity in achievement between women and men. A GDI of less than 0.500 show that women in these countries suffer the double deprivation of low overall achievement in human development than men.

º Income poverty line is $14.40 a day (1985 PPP US$) 1989-95 –as used in HPI – 2 calculation
* Income poverty line is $1 a day (1993 PPP US$) 1989-1998–as used in HPI – 1 calculation

Source: UNDP (2000).

1.1.1. - Location
About 70% of the world’s poor live in rural areas. Employment is informal, family or self-orientated and mainly in agriculture, providing only seasonal and fluctuating cash flows. Inadequate roads and lack of transport and communication isolate the poor from economic opportunities and limit access to social services including health, food , sanitation and education, in particular for women and minorities (Appendix One). Manipulation from intermediaries, depressed food prices, monopolistic marketing boards, and protectionism by developed countries makes it difficult for producers to access export markets and obtain market prices for their goods (Carney 1999, Creese & Bennett 1997). The disparity between rural and urban sectors is evident by the greater progress in human development and less deprivation for people in urban areas (UNDP 2000) .

1.1.2. - Lack of access to the formal sector
In most developing countries the informal sector accounts for between 50 to 60 percent of the workforce, whilst in some it can be over 90 percent. The informal sector is characterised by very small entities that are family orientated, providing for small local markets, requiring minimal capital investment and low-level labour intensive skills. Workers in the informal sector do not have formal employment contracts, they are unaware of their rights and do not have any effective lobbying force (Dassanayake 1999). Additionally, the lack of formal financial services enables rogue moneylenders to exploit the poor through informal saving schemes (Rutherford 1999b, Ford Foundation 2000).

1.1.3. - Health
Almost half of the world’s population does not have access to basic healthcare (STEP 1999) . Where public-financed facilities are available they are too far and are not usually of adequate quality or quantity (Dror & Jacquier 1999). In Africa the economic crisis of 1970s and 1980s resulted in cuts in state subsidies and the introduction of user fees which further limited access for the poor (Atim 1998).

The poor need health-care, their living environment is dirty and polluted causing a high risks of infections and diseases. HIV/AIDS are predominant in the poorer regions where income opportunities are low and information on sexual practice is non-existent. Vaccinations against measles, meningitis, tuberculosis, yellow fever and hepatitis are either unavailable or too expensive . Polluted water and air mean diarrhoea and respiratory infections are the most common causes of death amongst young children . Injuries and chronic illnesses resulting in long-term disability affect an estimated 5-10 percent of people in developing countries. Disability is related to poor education, nutrition and unemployment and caused by injuries or by communicable, maternal diseases (World Bank 2000, Brown & Churchill 1999).

1.1.4. - Education
Education is a route for upward mobility and a form of social security for parents in their old age (Wright 1999). However, very few poor children obtain an education as many have to work to provide household income. Without education the poor are unable to access wage employment in the formal sector or obtain important information on health and birth control (McKay 1997).

1.1.5. - Corruption
Democratic and participatory political processes are key to stable growth and poverty reduction. (World Bank 2000). “Democratic” central governments in developing countries are unable and unwilling to finance and manage social services to the poor (Creese & Bennett 1997). The policy environment determines the effect of economic growth on inequality (Goudie & Ladd 1999). Corrupt officials increase inequality and prevent the dissemination of economic growth to the poor in order to maintain their stronghold on power (Appendix One). They are influenced by the needs of powerful elite groups and multinationals that pay bribes in return for favourable policies. The poor have no voice in the political area, most public resources are spent on debt servicing, maintaining the wealthy, subsidising inefficient state enterprises and undertaking military purchases (Hulme & Mosley 1996). There is a lack of public accountability, credible information, transparency, regulation and sound financial supervision. . Money and power undermine the independence of the judicial system . The lack of regulatory enforcement and low paid government officials provide a breeding ground for corruptive practices. Poor people and in particular minority ethnic groups have little knowledge of their rights and have limited understanding of the written law (World Bank 2000).

1.1.6. - Natural disasters and civil war
Over the past ten years the incidence of natural disasters has increased, adverse weather situations such as drought, flood and storms are becoming more frequent and more severe. The settlements of the poor are commonly found in hazardous or coastal areas where nobody else has the use of the land. These slums are highly inflammable, structurally very weak and prone to collapse (Pollner 2001). Between 1990 and 1998, 94 percent of the world’s 568 major natural disasters and more than 97 percent of all natural disaster related deaths were in developing countries. People in low-income countries are four times as likely to die from catastrophes than those in high-income countries (World Bank 2000). The majority of civil conflicts are also in poor countries, the poor are easily manipulated to uprise due to their frustrating situation . Many of these conflicts lead to widespread devastation and the mass slaughter of women and children.

1.1.7. - Women in poverty
Women are disproportionately represented among the poor and the challenges they face are greater than that of men (Appendix One). It is women who bear the burden of poverty, taking care of the sick, working extra hours and giving up their food and education in times of crisis (Ford Foundation 2000). They are culturally regarded as inferior and are usually assigned to part-time, temporary or occasional work, which is the most vulnerable to economic pressures (Dassanayake 1999, Hulme & Mosley 1996). Women bear the brunt of arranged marriages, migration and child fostering and usually lose out more then men during downturns (Morduch 1999). Very poor women face geographical and social exclusion, they lack self-confidence, and have restricted access to training and information on health and nutritional problems. This leads to a large number of unhealthy babies and an increased strain on the resources of the household. (Dunford 2001). Literacy rates are also low for women as they stay at home helping with the housework and agriculture, this reduces their employability, understanding of legal rights and their ability to make informed health decisions. They are regarded as belonging to the husband’s family and therefore a wasteful investment (Dassanayake 1999).

A woman is the head of the family in more than one-fourth of all households due to increasing divorces, migration by husbands and death in civil war, however limited access to adequate education and training prevents the growth of women’s micro-enterprises. Majority of women entrepreneurs in the informal sector work long hours in poor conditions for low and irregular income. They lack capital, have little bargaining power and have to rely on manipulative moneylenders. They are not protected from sickness, death or accidents, which continuously hinders their capital formation (Women’s World Banking et al 2000, Women and Micro-enterprise Initiative 1999, Dassanayake 1999). The empowerment of women will contribute to the well being of the whole family and the community, enhancing the entire development process. Women with better education and autonomy are more able to protect their children and increase their development. With equal opportunities and new productive economic roles women can become successful entrepreneurs and provide for better economic growth (Dassanayake 1999, Dunford 2001, Hulme & Mosley 1996).

1.2. - The impact of risks on the poor
As discussed above, poor households face difficulty in generating regular and substantial income and are extremely vulnerable to economic, political and physical downturns (Matin et al 1999, Brown & McCord 2000). Additionally, the inequality, lack of diversification and social injustice faced by the poor mean that unexpected losses can only be met from existing funds, there are limited opportunities to find other sources of income or assistance. For the poor and for those just above the poverty line, a drop in income or increase in expenses can further reduce their already low standard of living. The risk is that some peril such as death, sickness, accident or old age may interrupt income, forcing the disposal of productive assets or household consumables to recover from the loss, which in turn decreases future income and current livelihood (Ali 2000). The frequency of losses are also greater on the poor, life expectancy is lower, and illness, disability and crime rates are higher than the average citizen, many are exposed regularly to harsh weather, political instability and economic mismanagement (Hauck 1997, World Bank 2000, Brown & Churchill 1999). Without investment in health the productivity of the household’s labour force is diminished, as the informal sector is predominantly labour intensive (Wright 1999). The high risks of death and disability mean the loss of the income earner (usually the man) without able substitutes is quite common, this is due to lack of access to training, education and opportunities for women (Brown & Churchill 1999). Crimes such as theft and violence occur regularly in a poor neighbourhood, where there are no adequate means of safeguarding assets. Cheaply constructed houses in slum areas are more likely to be destroyed by fire and natural disasters, spiralling many households into poverty following the depletion or damage to productive assets (Morduch 1999).

To cope with a loss the poor have to resort to emergency measures such as child labour, malnutrition and reducing children’s education and family healthcare (World Bank 2000, Wright 1999). Also the fear of losses can mean sacrificing new technologies and profitable business opportunities, impeding any possibility to move out of poverty (Morduch 1999). The poor are already limited to low-risk and low-return strategies due to the lack of working capital, opportunities, inputs and skills. Subsequent exposure to risks and the accompanying uncertainty leads to even less growth focused opportunities taken (Brown & Churchill 1999). It is therefore important that the poor are protected from these risks if not to directly alleviate poverty but at least to enable the benefits of other measures such as education, gender equality, sanitation, employment opportunities, population control, healthcare and nutrition to be realised.

1.3. - Risk-coping mechanisms
In addition to coping with the effects of risks, the poor also need resources to deal with lifecycle events such as marriage, birth, death, education, and old age. They need to be able to take advantage of income-generating opportunities or acquire life-enhancing consumer durables such as TVs and refrigerators. The poor therefore occasionally need access to large sums of money to deal comprehensively with these requirements without affecting their current or future livelihood (Rutherford 1999a). Unfortunately, the poor have little means for money management, as there is little access to banks and insurance companies (Rutherford 1999b). There are no unemployment benefit or pension plans available and no easy access to credit markets in times of volatile flows of income. To provide protection against risks the poor have in the past developed informal insurance mechanisms such as selling assets, exchanging gifts, cash transfers and diversifying crops, unfortunately these have proved inadequate and have instead retarded economic growth and social mobility (Morduch 1999). Since the 1970s there have been many pro-poor banking institutes established in the semi-formal sector including micro-finance institutions (MFIs) and non-governmental organisations (NGOs) to satisfy this need (Rutherford 1999b). It has now become recognised that poor people can save and want to save, and their need to access lump sums in return for smaller affordable payments can be satisfied in the following ways:

a) Savings deposit – lump sum in the future from small savings now.
b) Loans - lump sum now for saving (repayments) in the future.
c) Insurance – lump sum at an unspecified time for series of savings (premiums) now and in the future.

Many elderly people live in poverty due to limited access to pension plans and saving facilities and the low income of other family members. Consequently they have a large number of children to provide informal social security for their later years. Convenient and reliable savings schemes allow households to reduce the number of children they have without undermining their ability to cope with a lower income in old age (Morduch 1999). In particular, women, as well as an important source of labour are also an important savers group. They are better savers then men, they spend their money more wisely and take care of food and health needs, take care of the sick and elderly and provide for the education of their children. They have invaluable knowledge and understanding of the problems and constraints facing the poor, and reinvest more in their family and community (Dassanayake 1999). Without easy saving opportunities the poor tend to spend or lend to friends and families foregoing any long-term capital accumulation. Savings can ensure that basic needs are covered in times of household shocks such as old age, death and disability (Rutherford 1999, Morduch 1999)

Loans help the poor to diversify their risks, invest in productive assets, and enable education, healthcare and lifestyle expenses to be within reach. Access to credit enables the poor to smooth consumption during periods of low income or unexpected losses without having to sell productive assets or spend working capital. It enhances gender equality by giving the woman the opportunity to make a larger contribution to household income and increase her role in the family (Wright 1999, Matin et al 1999).

Whilst both savings and credit facilities are integral in assisting the poor overcome unforeseen losses their benefits are limited to the capacity of the individual to save or make repayments. When bad conditions and their consequences persist for several years such as drought and flooding, then the use of savings as protection are limited. In addition, high risks of illnesses, death and disability of the breadwinner means outstanding loans become difficult to repay (Ford Foundation 2000). Debt bondage is a form of child labour that is a consequence of loan default, the bonded labourer has to work off a loan contracted many years or generations ago at terms that make full repayment impossible (SFU 2000). There is also a high risks of non-payment due to lack of protection against natural hazards which limits the availability of credit to the poor (Hulme & Mosley 1996). In Eastern Africa compulsory savings are locked in to act as security for loans, and ensure good repayment rates. However, as well as restricting access to savings, most loans are only half as large again as the savings and are not sufficient to cover all risks or losses (Rutherford 1999).

Consequently, insurance has been recognised as the most appropriate means for protection against highly unpredictable events, whilst savings can still be used for more predictable risk (Atim 1998). Although in some cases the substantial costs of predictable events, such as death, may mean insurance is a better option.

Source: Atim (1998)
Funerals as an example, are a major expense for the poor , aggravated by the rise in HIV/AIDS. Selling assets, obtaining credit, drawing on savings, receiving gifts or purchasing insurance are possible methods available to pay for the costs. Selling assets is difficult due to the time lag and lack of available assets, use of credit and savings mean either greater debt or sacrificing a productive use of accumulated wealth and gifts are monetarily insignificant. Therefore funeral insurance is the most appropriate and affordable method to cover the expense (Roth 2001).

1.4. - Micro-insurance
Insurance is the most effective means of reducing the vulnerability of the poor from the impacts of disease, theft, violence, disability, fire and other hazards. Insurance protects against unexpected losses by pooling the resources of the many to compensate for the losses of the few, the more uncertain the event the more insurance becomes the most economical form of protection. Policyholders only pay the average loss suffered by the group rather than the actual costs of an individual event, insurance replaces the uncertain prospect of large losses with the certainty of making small, regular, affordable premium payments (Brown & McCord 2000, Brown & Churchill 1999). The primary function of insurance is to act as a risk transfer mechanism, to provide peace of mind and protect against losses. Risk can be handled by either; assumption, combination, transfer or loss prevention activities. Insurance schemes utilize the combination method by persuading a large number of individuals to pool their risks into a large group to minimize overall risk (Ali 2000). In the developed world insurance is part of society, such that some forms of cover are required by law. In developing countries the need for such a safety net is much greater, particular at the poorest levels where vulnerability to risks is much greater and there are fewer opportunities available to recover from a large loss.

1.4.1. – Types of micro-insurance products
Loan protection insurance ensures that in the event of death all outstanding repayments are written off. Health and disability insurance enables the poor to cover the costs of medicine, hospital stay and treatment as well as protecting the loss of income due to sickness or injury . Funeral insurance covers the costs of burial, and property insurance replaces assets lost due to theft, damage or destruction (Brown & Churchill 1999). Livestock insurance is important in developing countries where animals are not only a source of food but are used for agricultural production and transport (IDB 1977). Life savings insurance, which pays the deceased beneficiary the amount held in the savings account plus a benefit enables funeral expenses to be taken care of and replaces some of the loss of income source (Brown & Churchill 2000) . Insurance can cover the risks of damage, piracy and theft of goods in transit which is much greater in developing countries, particularly for those that are landlocked. Commodities account for about 34 per cent of the export earnings of developing countries, in Africa they represent 79 percent. Producers are vulnerable to a number of geological and environmental risks including floods, earthquakes, droughts, typhoons and hurricanes. Crop insurance schemes can protect the producer from the losses of climatic and natural disasters . The availability of agricultural insurance including crop insurance, machinery, raw materials and even life-insurance gives greater assurance to credit providers to service the poor (Matringe 1997). Insurance is vital to ensure the continued access to credit and greater security for the individual. For the MFI, providing insurance products lowers default rates and reduces the clients need to draw down on savings, which improves the profitability and sustainability of the organisation (Ford Foundation 2000, Brown & Churchill 1999, Hulme & Mosley 1996).

1.4.2. – Micro-insurance and human development
In the past poverty has been measured solely by per capita income, however, it is now widely recognised that poverty also includes deprivation from health, education, food, liberty and opportunity. The Human Development Index (HDI) measures welfare of people using three factors, income (GDP per capita), educational attainment and life expectancy at birth (UNDP 2000). Micro-insurance programs can increase HDI by providing creditors with greater security and incentive to lend to micro-enterprises (World Bank 2000). For the individual, reducing risk through insurance enables credit and savings to be used more productively on income-generating opportunities (Devaux 2000, Matin et al 1999). With greater resources and a safety net the borrower can take on greater risk to achieve higher income and stimulate outside investment. They can also market their products outside of the local market achieving a better price for goods and for raw materials (Ford Foundation 2000). Insurance enables the policyholder to save a portion of his income, without the need to use it on medication, fire, theft and death, it can instead be invested in a child’s education. The requirement for less income also enables parents to send their children to school instead of working in the fields, better education leads to better health and better income earning potential as well as population control (World Bank 2000). Health insurance enables access to better medical services and a better quality and longer life. Access to adequate insurance protection can assist the poor to achieve sustainable growth and provide them with the capability to attain a better standard of living. It can mitigate the impact of personal and national calamities on the build up of assets, providing escape from the viscous circle of poverty that engulfs each new generation. Insurance can also protect those that have risen above the poverty level against unforeseen events that may cause them to fall into poverty again. Insurance provides security where none is available from the state, it facilitates self-sufficiency and empowers people to build for their own future.

Whilst the benefits of insurance for the poor are clear there are still very few micro-insurance schemes which have proved their viability and sustainability. The next chapter will look at why it has been so difficult to provide the same insurance products to the poor which are so widely available in developed countries.

Insurance is not as widespread in developing countries as in the developed world and in the poorest of countries it is virtually non-existent. Available figures show that only Nigeria has any officially recognisable form of insurance from the 35 countries identified as low in human development (HDI<0.500), all developing countries, even those with large populations have a very low proportion of the world insurance market. Of the 42 medium human development countries for which information was available, despite population increases, 29 had decreased their proportion of the world insurance market with only India, China and South Africa increasing between 1998 and 2000 (Appendix Two). In 1998 the three largest insurance markets (U.S.A., Japan and the U.K.) covered almost 64% of the total world insurance market but only 8% of the world population, by 2000 this had grown to almost 69%. Formal (legal) insurance is not being made available where it is needed the most, where human well being is at the lowest and vulnerability at its highest.

Availability of insurance in countries with low human development compared to those with high human development

ªHDI (Human development index) – composite index based on life expectancy, educational attainment and standard of living. A HDI value equal to or more than 0.800 has high human development, 0.500-0.790 HDI has medium human development and a HDI below 0.500 reflects low human development and well being.

*Only those 88 countries with premium volumes more than USD 150 million have statistical data provided in Sigma

Sources: UNDP (2000), Sigma (1999) and Sigma (2001).

The lack of interest by the formal sector to serve the poor is due to low collateral, higher transaction costs, interest rate restrictions, corruption, uncertain profitability, high risks, lack of pro-poor values and inability to serve the specific needs of the poor (Matin et al 1999). Insurance is a capital-intensive industry requiring large start up costs and financial commitments, modern technology and a well-educated workforce. Additionally, monetary stability, opportunity for investments, a politically and economically stable environment and a sound consistent, favourable and fair regulatory system is not available in developing countries (Ripoll 1996). Consequently, the provision of insurance to the poor has been left to the informal sector through existing microfinance institutes, NGOs, credit unions and co-operatives without overwhelming success. These organisations are faced with a multitude of problems and issues that prevent them from providing adequate, affordable and secure insurance products.

2.1. - Coverage
Protection has to be restricted by age, loan size, value and causes of loss to maintain affordable premiums and solvency of the scheme (Morduch 1999, Brown & McCord 2000). Health insurance clients are still forced to pay a large amount for medical expenses themselves, therefore low premiums with low coverage are not smoothing the healthcare shocks of the poor . Additionally for those that live far from health care facilities the costs and time of travel is too high (Creese & Bennett 1997). The quality of healthcare also suffers as good doctors and nurses do not want to be located where the majority of poor reside without additional financial compensation.

Very few institutions offer property insurance to protect the policyholder against loss or damage to equipment, livestock, small amounts of gold or cash that has taken many years to accumulate and whose replacement is unaffordable. This is mainly due to the high moral hazard and difficulties in establishing the true cause of loss or damage. Where cover is provided this is limited to specific causes of loss, and usually not against frequently occurring risks e.g. flooding in the rural villages of Bangladesh (Brown & Churchill 2000). Agricultural insurance is mostly found in towns protecting the risks of purchasers, lacking any penetration in the mass rural producer population due to their low productivity. As informal schemes cannot access reinsurance markets, protection on events that may effect a significant portion of policyholders such as catastrophic losses are not provided. Consequently, policies have to be limited to risks absorbable by the small capital base of the provider (Brown & Churchill 1999, Brown & McCord 2000, Matin et al 1999, Dror & Jacquier 1999). Most current insurance arrangements are informal self-insuring schemes, set by particular tradesmen facing certain risks such as death or marriage, these are more effective and affordable for those that are slightly better off than the poor (Matin et al 1999). Some schemes are established to protect the liability of the institute, providing loan protection rather then life savings insurance and standalone term endowment policies which may provide a greater benefit to the poor (Brown & Churchill 2000).

2.2. - Regulation
Insurance regulations protect consumers and insurers from financial instability and misleading selling practices. However, in developing countries regulations are targeted at serving the middle and upper income markets and hinder the delivery of insurance to low income communities. High capital requirements make developing products for low-income markets uneconomical for established insurers due to the small premiums and high risks. Consequently, micro-insurance providers have to operate informally, without access to expertise and reinsurance (Brown & Churchill 1999,Brown & Churchill 2000).

Insurance regulation is important to maintain the credibility of the insurance industry, unfortunately, in many developing countries regulatory requirements are not adhered to. Many government agencies do not have adequate financial resources, qualified staff, relevant information and operational independence to effectively supervise the insurance industry. Obtaining and distributing accurate and objective information on enterprise performance and solvency is costly but necessary to enforce effective regulation and monitoring. In developing countries financial reporting systems and standards are not harmonised, performance statistics of providers are unreliable and it is very easy to overstate profitability, capital margins and general financial health (Dror & Jacquier 1999). Insurance organisations have not reached a suitable level of maturity in developing countries due to inadequate financial and logistical resources, unsuitable regulations, and insufficient knowledge and information. Corruption and cronyism in governments means insurance provision is secluded to the upper and middle class sectors, there is no confidence in the quality and soundness of financial institutions (Savage 1998, World Bank 2000).

Regulation of micro-insurance is even more important, as the client base is uneducated and lacks the ability to assess the performance of the provider, who also lacks the expertise to efficiently run and manage an insurance business (Wright 1999). As most MFIs do not operate within the guidelines of the law they must dedicate additional resources to ensure sufficient capital and reserves, provide regular financial reports and monitor the activities of their agents (Brown et al 2000). Operating in the informal sector means more care is needed when dealing with data and monitoring the performance of the organisation. Without effective regulation and the ease of entry and exit, the possibility and opportunity for negligence or unscrupulous behaviour is quite high. Uneducated consumers, particularly amongst the poor are continuously defrauded and sold fictitious policies by unlicensed insurers, resulting in claims not being paid when losses occur (Savage 1998). Insurance is much more complex than simple savings and loans and there is a high possibility of misinterpretation of exclusions and coverage. The provider has the legal and financial resources to dispute a claim whilst the poor do not. The lack of contract enforcement means that consumers are not protected against losses from the insolvency of the provider or from fraudulent behaviour (Savage 1998, World Bank 2000, Wright 1999).

2.3. - Morale Hazard
Moral Hazard is the risk that the insured will change his/her behaviour and increase the possibility of a claim (Ford Foundation 2000). This is more likely in microinsurance as the policyholder has little to lose and a lot to gain. In the case of loan protection insurance, the lender may have less incentive to ensure that payments are made on time and in full and the borrower may invest in higher-risk higher-return activities. The policyholder also may be less likely to look after his/her health, property and spending patterns in the knowledge that insurance cover is available (Dror & Jacquier 1999, World Bank 2000, Morduch 1999).

2.4. - Education
There is a lack of education amongst the poor about insurance, they find it difficult to understand and accept the risk pooling concept, leading to high drop out rates particular from clients that have not made a claim (Ford Foundation 2000, Brown & McCord 2000, McCord 2001, Havers 2001, Vogt 1999, Brown & Churchill 2000). Insurance has a poor image amongst the poor, insurance officers are seen as quick to sell and slow to pay, claims processes are hindered by bureaucracy, and policy limitations and exclusions are unclear due to complex policy wordings. Clarifying insurance policies is an additional costs and burden on the provider, especially as the policyholder may not be able to read let alone understand the terms and conditions (Brown & Churchill 2000, Vogt 1999, Dror & Jacquier 1999).

In developing countries insurance is not mandatory and the poor have many other important items to spend the little disposable income they have. Additionally the uncertainty of loss as in property insurance makes it more difficult to sacrifice income than for more certain events such as death and healthcare (Brown & Churchill 2000). Premiums have to be affordable and the benefits of the protection need to be presented to policyholders regularly, especially those of the low-risk category. Marketing of micro-insurance products is more than just selling insurance policies, there is a need to educate the client on the benefits of the product, the coverage it provides and how to make claims. It is more difficult than selling credit or savings as there are no immediate tangible benefits, clients have to be convinced in investing in the cover for the long term and not try and recuperate his/her money through a claim. Consequently, the marketing and communication skills are just as important as technical know-how and more attention needs to be paid to customer satisfaction and feedback (Creese & Bennett 1997, Brown et al 2000).

2.5. - Technical expertise
Due to the high levels of risks and volatility of the client base, management of a micro-insurance programme requires an even greater level of technical expertise and actuarial capacity (Havers 2001). Substantial resources need to be dedicated to claims verification, policy processing and information systems to ensure adequate controls and efficient payment of claims. Strong underwriting procedures are required when only a small percentage of the market is insured to avoid over exposure to high-risk policyholders. Managers have to be able to predict future costs and claims using complex actuarial calculations and market research to ensure the sustainability of the scheme and efficient pricing . Information systems are important to track policyholders and verify claims, these are costly to implement and need staff training. Most MFIs do not have access to adequate management information systems that would provide accurate and timely information. Manual accounting systems and processes hinder management control, and where information is available MFIs do not have the ability to use it (Brown et al 2000). Expertise on investing reserves and surpluses are needed to provide an additional vital source of income and ensure future liabilities are matched (Brown & Churchill 2000).

Many small microfinance institutes particularly credit institutions move into insurance products motivated by the profits made by larger NGOs without grasping risk management strategies or techniques, this leads to many becoming insolvent and clients without any form of protection. Some microfinance institutions enter into more complex products without having the necessary administration systems, technical staff, distribution channels and financial strength to support their growth (Vogt 1999, Dunford 2001). MFIs can only provide simple products as they lack the expertise to successfully price, sell and service more complex products such as health and property. Even when considering increasing the coverage for basic outstanding life insurance the complexity of information requires a high level of expertise. Provision of health insurance is even more difficult due to the range of causes of health risks, the information required to assess these risks, and knowledge needed to identify fraud by the policyholder and the healthcare provider. Disability claims are complex in measuring the size of the loss and determining the value of ongoing payments (Brown & Churchill 1999).

The lack of skills and technology to effectively price products weakens the financial sustainability of the scheme. Products such as permanent life, health and property require specialist actuarial skills to undertake the complex calculations for pricing. Micro-insurance providers currently set pricing using simplified calculations that place a dangerous reliance on clients’ estimates of sufficient premiums. Insurance is a highly technical business and MFIs
do not have access to or can afford qualified skilled staff to operate an insurance scheme which covers a wide range of products effectively and efficiently. MFIs also do not have access to know-how or the training tools to empower local staff with the relevant knowledge and technology (Brown & Churchill 1999, Brown et al 2000, Brown & Churchill 2000, Ford Foundation 2000, Women’s World Banking et al 2000).

2.6. - Fraud
The poor are desperate to improve their standard of living and have greater opportunities for fraud in an informal environment (Ford Foundation 2000). The provider needs an effective claims verification system, which undertakes adequate investigation but does not delay claims. (Brown & Churchill 1999). The lack of reliable data on client’s age, health status and dependants makes it difficult to determine premium pricing and eligibility of coverage (Brown et al 2000). Verifying beneficiaries, assessing incomes and collecting contributions in the informal sector is a problem due to the lack of information and reluctance to declare (Roth 2001, Savage 1998, Brown & McCord 2000). Many claims are paid without verification due to the high costs of performing inspections. Appropriate internal control and management information systems are vital, as are regular and credible financial reporting systems to give management the opportunity to identify fraudulent activities. However, transparency and controls on management behaviour and good corporate governance practices are not common practice in developing countries, and the technology, expertise and culture are not available to ensure adequate controls.

The pay of supervisory staff in micro-insurance companies are not sufficient to guarantee their integrity (Savage 1998). Agents enrol as many policyholders as possible to earn maximum commission, regardless of risk profile and long term viability, and even resort to stealing a portion of premiums collected. In some institutions agents also acting as collectors of loan repayments, consequently become overburdened and allow low repayment rates and greater opportunistic behaviour by the client (Brown & Churchill 2000). Micro-insurance providers do not have the resources or capability to adequately observe and enforce controls on their own employees, never mind the policyholders.

2.7. - Adverse selection
Adverse selection occurs when a significant portion of high risks policyholders sign up to the insurance policy, if the policy is voluntary than those that are most likely to make a claim will be the first to sign up (Ford Foundation 2000). Reaching a sufficiently large pool size of the right mix of risks is critical to ensure that there are sufficient funds to pay claims, particularly for new insurance schemes whose lack of underwriting experience could endanger solvency (Brown & Churchill 1999, World Bank 2000, Brown & Churchill 2000, Dror & Jacquier 1999).

2.8. - Flexibility
It is important to verify claims and process payments quickly due to the lack of other financial support available to the poor, likewise, efficient reimbursement is important to health care providers as policyholders are not be able to pay the up-front fee (Brown & Churchill 2000). Unfortunately the manual processing system of an MFI leads to delays in obtaining proof of loss and paying claims (Brown & Churchill 2000). Schemes also need to accommodate the earnings volatility and lower contributions of the self-employed and informal workers (World Bank 2000) . Frequency of payment should match the ability of the client and the financial needs of the organisation to pay claims and operating expenses. . Most small savers do not buy insurance due to lack of access or unsuitable products (Ali 2000). Providers need to have constant communication with policyholders with volatile income streams, as demand may change from day to day depending on their economic circumstances.

2.9. - Affordability
The poor operate in a mini-economy in which all activity occurs in very small amounts, subsequently the relative transaction costs tend to be high, for this reason formal institutions are unable to provide services to the poor at an affordable premium (Matin et al 1999). The economic condition of the people affects the growth of insurance, an individual must have the ability to save and earn a regular income to become a potential policyholder. There is a clear correlation between the socio-economic level and the ability to purchase insurance, many low-income communities are excluded access due to their lack of financial resources (Vogt 1999, Creese & Bennett 1997). The majority of income of the poor is spent on life cycle needs such as food, shelter, health and education, with very little available for insurance and savings (Brown & Churchill 1999, Matringe 1997).

2.10. - Retention
Client exit is a significant problem for MFIs, most dropouts occur when there is a downturn in the economy or adverse conditions in agriculture (Wright 1999). Dropouts are also very high due to changes in prices, change in service, misunderstanding of policies, lack of effective and focused marketing and other more pressing needs on clients income . In health insurance where pre-existing conditions are not excluded, clients build up a series of illnesses, use the policy to gain treatment and then wait for another set of illnesses to build up before enrolling in the policy again.

2.11. - Sustainability
Existing microinsurance schemes are far from being sustainable and viable institutes . In the initial years of operations most insurers incur a loss due to; the costs of acquiring and servicing customers, start-up costs of operations, inexperienced underwriting and premium setting and a small market base. These losses can constrain future growth, and if continued can result in the depletion of reserves and lead to insolvency. Whilst premiums need to be kept affordable they should also ensure the financial sustainability of the insurer, irregular flows of income in low-income households make it difficult to predict income streams. Consequently, a sufficiently large pool size is required to justify the substantial resources to market and administer products to a largely uneducated, sceptical and remote population. Overuse of services, escalating treatment costs and fraudulent claims have caused some health insurance plans to incur large losses (Brown & Churchill 2000). Government restriction on investing abroad and the lack of expertise to undertake a prudent but successful investment strategy restricts returns on surpluses and prevents hedging against inflation and currency movements (Brown et al 2000, Ford Foundation 2000, Creese & Bennett 1997). The costs of distribution and small margins mean that the vulnerability of the organisation is high and sustainability is difficult to achieve. In addition there is no reinsurance available to informal insurance providers, leaving them highly exposed to fluctuations in claims expenses (Brown et al 2000).

Insurance schemes for the poor are financially unsustainable due to high overheads, low premiums and high claims. There is a need for either a large capital base or donor contribution in the initial years to give time for the correct infrastructure and number of policyholders to be obtained. The majority of schemes rely on funds other than those received from premiums to maintain sustainability and to ensure that the low-income markets continue to be served (Brown & Churchill 2000).

In summary the challenges facing the micro-insurance provider operating in the informal market to keep premiums affordable and coverage sufficient are huge (Appendix Three). The added need for qualified staff, internal controls, efficient administration systems, reinsurance and resources for marketing and education mean that establishing a sustainable and viable insurance scheme is almost impossible in the short-term. The micro-insurance provider faces the compromise between how low into the poverty sector the scheme can penetrate whilst maintaining full cost recovery. The following chapters looks at suggestions and solutions put forward that may assist the micro-insurance provider to eventually achieve sustainability in the long term whilst still providing access to the poor.

“A good financial service for the poor is one that is done in the most convenient, flexible, affordable and safest way” (Rutherford 1999b).

3.1 Lessons learnt
There are many challenges facing the micro-insurance provider and over the years many schemes have failed, but some have adapted innovative techniques to achieve sustainability and viability in the long term.

3.1.2. - Adverse selection
Terming all policies inactive until a certain number enrol into the scheme, or requiring the whole household to enrol as a unit of membership can assist achieving critical mass. Many credit unions add insurance as a mandatory requirement of an existing service, such as life insurance products on loans . Group based insurance schemes provide cost savings in administration and distribution as well as spreading the risks profile. It is important that the group is pre-existing and not formed for the purpose of accessing insurance as this would attract a disproportionate number of high-risk individuals. The difficulty is to get people to pay premiums on a policy not taking effect and secondly to ascertain the appropriate number required to diversify the risk portfolio of the scheme (Brown & Churchill 1999, Creese & Bennett 1997, Brown & Churchill 2000).

3.1.3. - Flexibility
Different coverage for different premiums can bring in people at the lower level with a view of encouraging them to take on additional coverage for additional premium later on. Insurance schemes must adapt to the living and working conditions of its customers, listening to their needs and priorities and installing trust-building measures that negate the aversion of an up-front payment (Dror & Jacquier 1999). There should be continuos product development and innovation to meet the needs and lifestyles of the poorer classes and the rural sector. Flexible payment systems would allow them to pay when and how much they can. Tiny, often weekly payments are often the key to ensuring full participation (Matin et al 1999, Dror & Jacquier 1999, Roth 2001, Brown & McCord 2000, Ali 2000, Brown & Churchill 2000). Also flexible payment methods such as linking with savings accounts, enable easy payment of annual premiums from interests received . Other options include in-kind payments, sliding scale of premiums and decentralising claims and administration to facilitate easy access (Brown & Churchill 2000).

3.1.4. - Education
‘Credit with Education’ is a strategy first developed by Freedom from Hunger in 1989-90 to improve household food security and child nutrition. This is integrated with group-based lending models such as ‘village banking’. At each meeting of the village banking group some time is set aside for learning by the field agent, the field agent is responsible for getting in new members, attending regular meetings, assisting financial transaction and training members. During the education session the agent answers questions and offers advice, encourages sharing of experiences and promotes solidarity within the group. The strategy has produced some very positive results on the livelihood of the poor, particularly women (Dunford 2001). A similar strategy is needed for insurance, more so due to the complexity of insurance and the lack of available examples. The challenge is to find field staff who has the integrity and respect from the villagers and who also has sufficient capability and interpersonal skills to effectively undertake the dual role required. Clients need to be assured on the integrity of the system and that there will be clear accountability on the use of funds (Brown & Churchill 2000, Roth 2001). The poor need to be shown how protection is accessed by other poor villages and given support to set up similar schemes in their own communities through regular consulting, listening to the consumer and real participation (Creese & Bennett 1997, Rutherford 1999b) .

3.1.5. - Fraud
Information systems that account for finances, analyse claims performance, calculate premiums and ensure eligibility are important to keep control on fraud (Creese & Bennett 1997). Close monitoring of treatment costs and types of treatment are needed over the health care provider. Information requirements such as health history and formal death certificates deter client fraud. Stricter policy clauses, application of underwriting standards, a transparent claims procedure, and the use of deductibles and penalties for loan defaulting clients can reduce the policyholder’s motivation to make false claims (Brown & Churchill 2000). Maintaining the credibility of the organisation is paramount in ensuring that people have faith in the protection promised and will invest into the products offered. The organisation needs to be accountable and transparent in its operations and employees need to be adequately paid to deter corruption.

3.1.6. - Summary
Microinsurance requires a physical closeness between the two parties, smaller organisations are more responsive, efficient and flexible and have a closer distribution relationship than larger players (Ripoll 1996). In the same light financial viability also requires a detailed understanding of clients needs and preferences and an efficient delivery system (Matin et al 1999). The two biggest problems facing microinsurance providers is sustainability and affordability. For any scheme to be sustainable in the long term there is a need for access to a sufficiently sized group to spread the risk and costs of the scheme. An efficient and effective micro-insurance scheme demands high premiums to cover the costs and profit requirements which would effectively mean excluding access for most of the poor. In addition the use of deductibles and co-payments to tackle morale hazard and fraud lead to further exclusion.

Using the community spirit and organising the poor to access necessary services has been done effectively and efficiently for centuries using the co-operative structure. Agricultural co-ops have satisfied the supply, processing and marketing of goods, consumer co-ops have provided goods and services of preferred quality at competitive prices, workers’ productive co-ops have created and maintained employment in the community. Housing co-ops have given low-income people the opportunity to own their own homes and electricity and telephone co-ops have satisfied rural peoples’ needs for power and telecommunications. Co-operative banks and credits unions have served people of limited incomes and extended credit to micro-entrepreneurs (ICA 1995b). In 1996, membership of the International Co-operative Alliance (ICA), the apex body of the world co-operative movement covered 230 organisations serving more than 730 million individuals in over 100 countries (ICA 2000). In the financial services sector the World Council of Credit Unions, Inc. (WOCCU) represents over 36,000 credit unions which provide 108 million members access to safe savings and affordable credit (WOCCU 2001). The success of the co-operative structure and the co-operative philosophy in satisfying the needs of the poor in an effective and flexible manner makes it a good candidate for channelling insurance products to the poor.

3.2. - Co-operatives
‘ A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social and cultural needs and aspirations through a jointly-owned and democratically controlled enterprise’
The 1995 ICA Statement on Co-operative Identity (ICA 1995a).

self help honesty voluntary and open membership
self-responsibility openness democratic member control
democracy social responsibility member economic participation
equality caring for others autonomy and independence
equity education, training and information
solidarity co-operation among co-operatives
concern for the community

Source: ICA (1995a).

Co-operatives are voluntary organisations without gender, social, racial, political or religious discrimination. They are democratic organisations controlled by their members who actively participate in management decisions and policies. Members contribute to, and democratically control, the capital of the co-operative (one member is equal to one vote). Co-operatives most effectively serve their members by working together locally, nationally regionally and globally for the sustainable development of their communities (Birchall 1998). There are two main types of co-operatives, consumer co-operatives (housing, credit unions and insurance) and producer co-operatives (agricultural, fishing and some worker co-operatives) (Spear 2000b). Co-operative insurance companies are linked
with democratic, progressive movements including co-operatives in other sectors, these links mean that co-operative insurance is operating in and supporting wider social and economic goals. Formal co-operative insurance companies can be stock, mutual or any other form dictated by the laws of the country. The key difference from private companies is its adherence to the co-operative principles, in particular those of member control, non-profit operations and activities centred around preserving the interest of members (IDB 1977).

3.2.1. - Providing insurance using co-operative principles
The oldest documented accounts of a voluntary prepayment scheme for healthcare is the mutual help schemes organised in Greece during the fifth century B.C. by trade groups to protect their members from the financial consequences of death, illness or incapacity (Creese & Bennett 1997). Recently, in the informal sector a number of innovative schemes based around co-operative principles have emerged to enable access to savings and lending products for the poor. These schemes have become the natural foundation for providing insurance products to the poor.

Group-based lending mechanisms have proved to be the most effective and efficient in providing financial services to the poor at minimal transaction costs and risks, they are also a good forum for education, information sharing, change, and solidarity (Dunford 2001). Savings clubs such as Rotating Savings and Credit Associations (ROSCAs) and Accumulating Savings and Credit Associations (ASCAs) are common structures used to satisfy the saving needs of low-income households. Such savings clubs provide a degree of risk-protection on less uncertain costs through marriage and burial funds and in some cases against damage to property (Brown & Churchill 1999). These community based saving and lending systems are popular with low-income households due to the ability to access borrowing at short notice, small instalments, convenience, little bureaucracy and safeguarding assets from relatives (Matin et al 1999, Rutherford 1999b).

Self-help groups, mainly composed of women also incorporate the philosophy of community spirit and solidarity, these NGO promoted groups have a number of different objectives including women’s empowerment, information distribution and business development (Rutherford 1999b). The Village Banking movement is another example of user-owned, group based financial services working in low-income communities. The object is to become an independent, self-financed and self-managed village-level institution providing loans to small businesses that stimulate savings and increase capacity to provide larger loans (Rutherford 1999b). The credit co-operative or credit union (also known as thrift and credit, savings and loans or caisse populaire) is a community based financial institution, which facilitates the habit of saving and provides credit on the basis of trust and peer pressure. The credit union has special policies to reach the bottom line members of the community by providing loans to micro-enterprise start-ups and exclusive services for women (ACCU 2001). Mutual Health Organisations (MHOs) and Community-based Health insurance Schemes (CBHI) combine the concept of insurance and participation. They are participatory independent non-profit organisations created by the members and are based on solidarity and democratic management. They use member contributions to manage risks and finance health care, and encourage better quality and more equal access to medical services and treatment (STEP 1999). All of these co-operative based institutions have provided financial services to the poor including insurance as member benefit programs for a number of decades (Appendix Four).

3.3. - Advantages of a co-operative/mutual insurance company
Organisations in the social economy such as co-operatives, mutuals and voluntary associations may be formed because the state does not provide sufficient quality or quantity of a particular service such as health, care and education (Spear 2000b). Consumer co-operatives generally emerge when existing services either are not accessible or not available (Ullrich 1997). Consumer co-operatives, such as an insurance co-operative, are considered as an extension to the individual members’ household economy. They aim to improve the conditions for the consumer and the economy of the household (which includes time, knowledge, self-sufficiency and money). The consumer co-operative will assist the households to organise and solve their problems through education, dialogue and improved access to services and products available (Blomqvist & Böök 2000).

3.3.1. - Identifying the needs of the poor
Co-operative and mutual insurers are in a better position to identify the needs of their customers and community due to the closer links through trade unions, credit unions, agricultural and consumer co-operatives. The resulting increased awareness and understanding enables a more personalised, flexible and appropriate service. Co-operative insurance companies operate for the benefit of their members and provide affordable premiums, fast and efficient service and responsive product development. (Vogt 1999, ACME 2000, Brown & Churchill 2000, IDB 1977, Birkmaier 1999). They offer stability through a clear community-minded mission and facilitate member involvement in distribution, promotion and product development to the benefit of all consumers in the community (Blomqvist & Böök 2000).

The mutual can take a long term, sustainable approach to management of the insurance scheme in the best interest of the member without needing to satisfy the short-term return requirements of shareholders, as the owners and members are the same. Stock companies are faced with a conflict of interest when the customer’s requirements do not provide sufficient profits or return on investments, which is one of the reasons why established insurers steer away from high-risk low-income communities and concentrate on the middle/high class customers demanding ‘off the shelf ’ products (Vogt 1999, Birkmaier 1999, Ali 2000). Co-operative insurers dedicate substantial resources to research, health promotion and loss prevention as the policyholders’ best interest is served by preventing losses (IDB 1977). There is an obligation to focus on all potential customers and not just the profitable ones, they have a duty to provide where there is a need, and the need for protection is the greatest by the poorest.

3.3.2. - Trust
In an environment where regulation is weak and corruption is high there is very little trust in any institution. This is more of a problem in the informal sector where the poor have no rights at all and are constantly manipulated. Co-operatives are more trustworthy, less likely to engage in opportunistic behaviour and exploit the consumer (Spear 2000a, Creese & Bennett 1997). The co-operative structure makes it easier to win the trust of the members, particular in the face of market failure and it is better placed to tap into member’s know-how, loyalty and ideas (Ledbeater & Christie 2000). The strong community relationship, good user networks, member involvement and democratic process encourage a growing feeling of trust and building of social capital to develop a better society. Trust is a major advantage of the co-operative and it encourages a greater number of transactions and commitment from the members to act in the best interest of their organisation and improve its economic efficiency (Spear 2000b).

3.3.3. - Morale hazard, adverse selection and fraud
Mutual insurance policies are participating policies, where policyholders share the profits or losses earned by the insurer. This reduces the risks borne by the insurer and decreases motivation for morale hazard and fraud by the policyholder. Peer pressure from within established social groups can encourage members to avoid morally hazardous behaviour, particularly in small groupings and communities. In community-based schemes, each
policyholder is an owner of the scheme and elects a group of policyholders to manage the operations, usually on a volunteer basis. This enables poor households to retain control and ownership (Brown & McCord 2000, Brown & Churchill 1999, Brown & Churchill 2000).

Due to lack of credible information in developing countries, particularly in the informal sector there is a need and reliance on local knowledge to underwrite policies correctly and verify claims (Roth 2001). Insurance provided through an established co-operative body means that risks are considerably reduced as each society has close knowledge and supervision of the member and his/her risks. This existing trusted relationships and solidarity with members provides the opportunity to build a stable policyholder base. This is important when incomes of participants grow at different rates and richer participants who find they are giving more tend to leave the group (Morduch 1999, Brown & Churchill 2000, IDB 1977). Membership-based organisation thrive when the members come from a specific loyalty or occupation as fear of future exclusion from the scheme and the accompanying social network keeps participation high (Ledbeater & Christie 2000, Brown & Churchill 1999).

Co-operative insurers are less likely to manipulate the poor and participate in underhand selling tactics such as over-pricing, misleading advertisements and excessive management costs. There is less likelihood of the manager taking advantage of asymmetric information and failing to enforce obligations as the policyholder is the owner and henceforth the employer of the manager (IDB 1977, Spear 2000b). The ownership of co-operatives by consumers, workers or suppliers mean that it is easier for them to monitor the performance of the company and its employees on a regular basis. Co-operatives involve their members not only in corporate governance but also in the day to day running of the scheme (Ledbeater & Christie 2000).

3.3.4. - Education
Co-operatives and mutuals have a long-standing affiliation with the poor and have the expertise and means of communicating the needs and benefits of insurance (Vogt 1999). The nature of insurance is based on the concept of mutuality, risks is shared by the many to protect the few, the poor are used to this concept as they are familiar with traditional mutual self-help mechanisms (Creese & Bennett 1997, ACME 2000). As members are owners of the scheme and ultimate beneficiaries of its success they have a strong incentive to educate themselves and learn about their own business (IDB 1977).

3.3.5. - Empowerment
Co-operatives empower individuals by providing them with the opportunity to participate in decisions that impact their livelihoods. It gives the poor a voice, gives them a choice, and a chance to find solutions to their specific social and economic needs (ICA 1995b, IDB 1977). Policyholders have representations on special advisory committees dealing with company performance, products and claims, enabling members to take direct control over decision making and on the quality, type and delivery of service. The co-operative structure allows the poor to have more bargaining power, benefit from economies of scale and negotiate better deals for themselves (IDB 1977, Ullrich 1997). Success of the insurance scheme would enable the co-operative to reduce the inequality and disadvantage of members, staff and the wider community (Spear 2000b, IDB 1977).

3.3.6. - Costs and price
Co-operatives do not operate under a profit motive, surpluses are reinvested or paid back to members, keeping costs and premiums down (IDB 1977, ICA 1995b). Community involvement reduces the costs of labour and resources needed for information collecting, educating, marketing and monitoring policyholders (World Bank 2000). The Co-operative structure enables lower costs by offering insurance to large affiliated groups, many farmers in developing countries belong to at least one co-operative society that provides them with credit, marketing, equipment or farming methods. These societies are a natural and cost-effective distribution channel for insurance particularly in remote areas and lower income groups in towns and cities (IDB 1977, Birkmaier 1999). Co-operatives make more effective use of the resources of their members and the economic-efficiency of the organisation as surpluses are returned to the members in the form of dividends, lower premiums, loss prevention activities or additional coverage (Spear 2000a, Birkmaier 1999).

3.4.1. - Capital
Mutuals principally rely on retained earnings to expand their capital base, they are unable to raise capital by issuing equity. This restricts their ability to undertake large and long term investments, preventing them from entering into new lines of business, regions or making acquisitions (Birkmaier 1999, Ledbeater & Christie 2000, Ullrich 1997). At or near the subsistence level, the poor have little available for saving and whilst these can be mobilised, to depend on them to provide the required capital is unrealistic in the short term (ILO 1974).

3.4.2. - Accountability
Offering insurance through co-operatives or credit unions as member benefit schemes surpasses regulatory requirements. Without the legal requirement of audited financial statements and performance reports, there is a greater need for internal mechanisms and transparency to ensure sufficient controls and checks are in place. Additionally, without the incentive of stock options to guide managers’ objectives and insufficient board control and expertise there is a greater possibility of fraudulent activity by company officers. Lack of control on managers also leads to members needs being ignored in product development and a lack of motivation to open membership to other groups. The co-operative can become an inward looking and stagnant organisation, it can also become a tool for government manipulation and propaganda (Hulme & Mosley 1996). Access to services requires permission from group leaders, who may abuse their privileged position to favour certain parties, be tempted to steal funds and exclude the poorest in the community. Mutuals, therefore, tend to concentrate more on lines of business that require limited management discretion and with less underwriting risks which may be to the detriment of the needs of the policyholder (Birkmaier 1999, Brown & Churchill 2000, Birkmaier 1999, Ledbeater & Christie 2000, McCord 2001).

3.4.3. - Technical expertise
Group leaders are not insurance professionals or managers and are unable to manage the scheme effectively and efficiently (McCord 2001). Managerial salaries in co-operatives tend to be lower than in the private sector and therefore cannot attract qualified personnel and modern technology (IDB 1977, Ullrich 1997). Limited experience in collecting and analysing data makes it difficult to design suitable coverage, establish premiums and set up adequate claims reserves (IDB 1977). There is an overwhelming need by co-operatives in developing countries for technical assistance and financial support to enable them to manage their insurance schemes (Rutherford 1999b, ILO 1974).

3.4.4. - Size
As the organisation grows it tends to lose its co-operative identity and also its closeness with its members needs (Ullrich 1997). Conversely, the organisation can also become inward looking and become an exclusive group, which prohibits new members and stifles innovation and progress (Ledbeater & Christie 2000).